Big Four appeal China ban

Chinese units of the Big Four accountancy firms are appealing a ruling banning them from auditing US-listed firms. Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian have launched their appeal with the US Securities and Exchange Commission (SEC), which last month handed out a six-month ban prohibiting them from providing services to US listed Chinese companies.

The banning order was made after the firms refused to comply with requirements to share audit papers with US authorities. According to International Accounting Bulletin, the filing with the SEC alleges that the order “ignored critical exculpatory evidence, and proposed sanctions that are inconsistent with the law”.

The four also argue that the ruling "misconstrued the operative legal standard which provides that only a 'willful refusal to comply' with an SEC request for audit work papers or other documentation constitute a violation of SOX [Sarbanes-Oxley Act]”.

Under SOX, foreign public accounting firms must furnish the SEC with audit work papers involving any company trading on US markets, when they are asked to do so. But the firms argue that complying with such a request places in them in breach of Chinese secrecy laws.

This is not the first time the SEC has taken this action. In December 2012 it launched proceedings against the China affiliates of each of the Big Four accounting firms and for refusing to produce audit work papers and other documents related to China-based companies under investigation for potential accounting fraud against US investors.

Back then, Robert Khuzami, director of the SEC’s Division of Enforcement, commented: “Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud. Firms that conduct audits knowing they cannot comply with laws requiring access to these workpapersface serious sanctions.”

A decision on the current ban and subsequent appeal, which will be taken by five SEC judges, could be months away.